If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nisun International Enterprise Development Group (NASDAQ:NISN) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Nisun International Enterprise Development Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = US$13m ÷ (US$108m – US$27m) (Based on the trailing twelve months to March 2021).
Therefore, Nisun International Enterprise Development Group has an ROCE of 16%. In absolute terms, that’s a satisfactory return, but compared to the Machinery industry average of 9.6% it’s much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Nisun International Enterprise Development Group’s ROCE against it’s prior returns. If you’d like to look at how Nisun International Enterprise Development Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Nisun International Enterprise Development Group’s ROCE Trend?
We weren’t thrilled with the trend because Nisun International Enterprise Development Group’s ROCE has reduced by 58% over the last five years, while the business employed 392% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that’s been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It’s unlikely that all of the funds raised have been put to work yet, so as a consequence Nisun International Enterprise Development Group might not have received a full period of earnings contribution from it.
On a related note, Nisun International Enterprise Development Group has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Nisun International Enterprise Development Group’s ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nisun International Enterprise Development Group. And the stock has done incredibly well with a 504% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you want to continue researching Nisun International Enterprise Development Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Nisun International Enterprise Development Group may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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